China Cement 1H17preview:Trending ahead of fullyear estimates;up cycle continues

Earnings beat highest for WCC, Sinoma and Conch followed by CRC

    Since the inflection point in Jul-16, cement pricing in 1H17has continued itsupward trajectory with nationwide cement prices up an average of 32% yoy.The strong price hikes mean median earnings could rise by ~71% for cementcompanies under our coverage. Although cement prices will correct in June andJuly due to seasonality, we are already seeing signs of price stabilization in someregions as the second round of peak shifting production halts kicks in. Based onour estimates, cement companies in 1H would have already achieved 48% of fullyearconsensus earnings, presenting upside risks to Street earnings upgrades.While the magnitude of earnings increase will likely decline into 2H, cement pricesshould still see ~13% growth in 2H even if we assume flat cement pricing fromhere.

    Upside surprises: low inventories, aggregates and RMB appreciation

    On 26October 2016, the MIIT and the environmental bureau introducedmandatory production halts for 15provinces in northern China from 2017-2020,ranging from 100to 150days per year. Similar production halt measures werealso rolled out in another 13provinces, reducing clinker and cement supplysignificantly. As a result, 1H17inventory levels across China were at the lowestlevel on record, helping ASPs rebound. Among the companies, BBMG saw thesharpest ASP recovery given its exposure to Northern China. The aggregatessegment should also do very well, with NP/t more than doubling in 1H, and playa role in strong earnings beat we expect for Conch. The surprise appreciation ofthe RMB, up 2.4% in 1H, should also boost bottom lines for companies that haveUSD or HKD debt, i.e. CRC and WCC.

    Downside surprises: lower cement volumes and higher coal costs

    Due to increased supply halts in 1Q17, 1H17volumes for cement companiesgrew by only 0.7% yoy, in line with the national average at 0.7% yoy for 5M17.For companies that have a higher exposure to northern China, volumes havedisappointed. i.e. 1H17volumes for BBMG will likely be down by 20% yoy by ourestimates. It is clear that smaller players have benefited more from productionhalts and have taken market share away from larger producers in 2017. Highercoal costs have also put a dent on production costs, with QHD coal priceaveraging RMB379/t in 1H16vs. RMB612/t in 1H17.

    2H17outlook: NW China is the best region in China this year

    NW China cement companies saw the most promising start in 1H17. Both Sinomaand WCC saw 1H17volumes grow by over 5% on the back of strong infrastructure